A three-year IMF programme for Pakistan has ended in September 2016. The outcomes of the programme have widely been disputed. The IMF and the government are of the views that the programme has helped the country restore macroeconomic stability and reduce vulnerability. In particular, economic growth has accelerated and inflation is down, external buffers have been bolstered, fiscal deficit has been reduced and social safety nets have been strengthened.
Independent economists on the other hand have strongly disputed these achievements. They believe that the 'success' in raising economic growth was achieved through exaggerating the growth rates of the key components of the real GDP each year. Inflation was down not because of prudent fiscal and monetary policy pursued under the programme but because of the collapse of international prices of oil and commodities on the one hand and destruction of domestic demand owing to the pursuance of stabilization policy for a prolonged period, on the other.
A reduction in fiscal deficit by 2.5 percent of GDP (excluding circular debt), that is, from 7.1 percent to 4.6 percent of GDP during a three-year programme was achieved through numbers of accounting tricks and gimmickries. External buffers have been bolstered by indulging in large-scale external borrowing.
Independent economists have been highlighting these issues through their writings in this newspaper. Today, an overwhelmingly large number of Pakistanis living within or outside Pakistan do not believe on the 'success' story of the IMF Programme. Never in the history have we witnessed such a wide reality gap in accepting "success story" on economic front.
What is happening to Pakistan's economy after the IMF Programme? This is the subject matter of this article. The key economic aggregates that were inflated to show a better performance of the economy during the programme period are now creating serious challenges for the government. Most economic indicators exhibit deteriorating trend after the IMF programme because these are measured against inflated bases.
Large-scale manufacturing (LSM) appears to have collapsed right after the release of July-March 2015-16 number, which was used in calculating real GDP growth for the year 2015-16. The LSM index continued to exhibit a rising trend starting from November 2015 and reaching to a peak in March 2016 when index grew by 7.6 percent. As soon as the Survey 2015-16 was released, the growth in LSM simply collapsed to negative 2.9 percent in April 2016, negative 1.1 percent in May 2016 and zero percent growth in June 2016. What happened to industrial growth overnight? Particularly, why it collapsed in April-June 2016? Why the factors that were driving industrial growth during November 2015 to March 2016 suddenly disappeared during April 2016 onward?
The LSM grew by 2.0 percent during the first four months (July-October) of the current fiscal year as against 4.4 percent during the same period last year. If we take a bit longer view, the LSM grew by only 0.36 percent during April - October 2016 as against 5.0 percent during the same period last year. The bottom line is that the LSM growth has collapsed and witnessing a virtual stagnation.
Agriculture has been growing at an average rate of 2.1 percent during the last eight years and 1.6 percent during the last three years. The prospects of agriculture remain dim in the current fiscal year due to a drought-like situation in the country. Agriculture is expected to grow in the range of 1.5-2 percent in the current fiscal year. Based on the performance of LSM and agriculture, the overall real GDP is expected to rise in the range of 3.5-3.8 percent - very much in line of the last eight years.
After the IMF programme, government's borrowing has shifted towards the country's central bank. As against the retirement of Rs 235 billion, the government has borrowed Rs 1079 billion (a turnaround of Rs 1314 billion) from the State Bank of Pakistan during July 1-December 9, 2016 for financing its budget deficit. This is a complete departure from the last three years when Pakistan was under the IMF programme. Credit to private sector is still less than that of last year during the comparable period despite the fact that the government, instead of heavily borrowing from commercial banks in fact retiring loan to commercial banks. Why the private sector still shy in borrowing and expanding businesses?
Given the depressed level of economic activity and the inflated base of last year, tax collection during the first five months (July-November) of the current fiscal year has simply collapsed. Tax collection is up by only 2.0 percent during July-November 2016 and declined by 8.5 percent in the month of November 2016 alone. What happened to tax collection after the IMF programme?
The low level of economic activity in the country is worsening the unemployment situation. No unemployment statistics are available beyond 2014-15; therefore, the evaluation of the current situation based on official statistics is not possible. However, given the trend, it is safe to suggest that it must have worsened after 2014-15. Unemployment was at 13-year high at over 8.0 percent (including discouraged workers' phenomenon) in 2014-15. New entrants to labour market are reduced to one-half during 2013-14 and 2014-15 as against an average of 1.3 million during 2008-13. One out of five graduate and post-graduate degree holders were unemployed in 2014-15. The situation must have worsened during the post-2014-15 period.
Exports are on the decline since 2014-15 onward. Exports have declined from over $25 billion in 2013-14 to less than $22 billion in 2015-16 - a decline of over 12 percent during the period. Exports are down by 3.9 percent during the first five months (July-November) of the current fiscal year. The government has failed thus far to identify the factors that have caused secular decline in exports. It has only blamed the global economic environment for declines in exports.
We believe that senseless taxation to achieve revenue targets under the IMF programme, holding the refunds of exporters with a view to jacking up revenue and hence creating serious liquidity problems for them, artificial stability in exchange rate created because of heavy external borrowing to bolster external buffer, infrastructural bottlenecks such as the availability and prices of electricity, gas, water and not so conducive business environment, are some of the factors that have eroded the competitiveness of our exporters. Without addressing these issues, the recovery in exports appears challenging going forward.
Remittances have been a major source of foreign exchange as well as a key factor in keeping current account deficit low in the past several years. Remittances grew by 18.2 percent in 2014-15 but slowed to 6.4 percent in 2015-16. Further slowdown is expected in the current fiscal year owing to the adverse budgetary developments in oil producing countries. Remittances are down by 2.5 percent in July-November 2016 as against a positive growth of 7.2 percent during the corresponding period of last year. This is emerging as a serious challenge for Pakistan's external sector going forward.
Foreign Direct Investment (FDI) is an important source of foreign exchange earnings and is regarded as a major non-debt creating inflows to finance current account deficit. Pakistan received $1.9 billion FDI in 2015-16. FDI has nosedived to $460 million during July-November 2016 as against $840 million in the same period last year - a decline of 45 percent. Such a low level of FDI would force the government to rely heavily on debt creating inflows to finance current account deficit.
Finally, debt - both public and external - is on the rise with a threatening pace. During the last eight years (2008-2016), external debt and liabilities have increased by $32.7 billion. In other words, almost 45 percent of total stock of external debt and liabilities have been added during the last eight years alone. Pakistan has added $12 billion during the last three years and the remaining $20.7 billion during 2008-13. In the first quarter (July-September) of the current fiscal year (2016-17), we have added another $1.6 billion to reach at $74.6 billion. Total loan disbursed during July-November 2016 is $3.0 billion, of which, loan from China ($1189 million), Noor Bank Dubai ($200 million), IDB ($212 million) and Sukuk ($1000 million) accounted for 86.5 percent. Most of the Chinese loan ($1013 million) came under CPEC projects. Pakistan has added Rs 865 billion in public debt during the first three months (July-Sept) of the year. In other words, the government has added public debt at the rate of Rs 288 billion per month. Given the financing requirement of the current fiscal year ($15 billion), Pakistan's external debt and liabilities is projected to reach $81 billion by end-June 2017.
The unraveling of the economy soon after the completion of the IMF programme is consistent with our views about the outcomes of the programme. Most economic indicators show a deteriorating trend. For example, the growth of large-scale manufacturing is low and stagnant, private sector is still shy and borrowing little to expand their businesses, tax collection by the FBR has collapsed, unemployment situation is worsening, borrowing from the central bank has returned with full vengeance; exports, remittances and FDI are down, the country has lost $753 million reserves in the last 35 days, and debt is on the rise with a threatening pace. Economy appears to have gone off the screen of the political leadership. No one appears to be interested in salvaging the economy.
(The writer is Principal & Dean at NUST School of Social Sciences & Humanities, Islamabad. Email: ahkhan@s3h.nust.edu.pk)